How to sum up the effect on oil markets of OPEC’s strategy since 2014? Based on how the fundamentals have evolved, it's been a pretty mixed bag.
There’s little for OPEC to crow about on the supply side. Lower oil prices proved a red rag to a bull for US tight oil operators. Volumes have roared back to record levels, forcing OPEC to keep its oil off the market until at least 2019, and are set to double to 10 million b/d by the mid-2020s.
Conventional producers worldwide have rediscovered the inner entrepreneur, too. Non-OPEC production outside the L48 has been astonishingly resilient, though reduced investment will take its toll in time.
Were OPEC to seek vindication, it need look no further than demand which really is on a roll.
There’s little for OPEC to crow about on the supply side. Lower oil prices proved a red rag to a bull for US tight oil operators. Volumes have roared back to record levels, forcing OPEC to keep its oil off the market until at least 2019, and are set to double to 10 million b/d by the mid-2020s. Conventional producers worldwide have rediscovered the inner entrepreneur, too. Non-OPEC production outside the L48 has been astonishingly resilient, though reduced investment will take its toll in time. Were OPEC to seek vindication, it need look no further than demand which really is on a roll.
Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century.
If global demand growth has been resilient, there has been a big shift in where growth is coming from. OECD demand peaked in 2005 and is currently 3 million b/d lower than that peak. Non-OECD growth in contrast has been rampant at 16 million b/d since 2005, reflecting strong economic growth in emerging economies. China has been a big factor. Annual non-OECD consumption finally eclipsed the Old World in 2014 for the first time, a position it will never lose.
But low oil prices have, for the time being, narrowed these diverging trends. OECD demand has accelerated, growing by an average of 0.5 million b/d p.a. since 2014; after declining at 0.3 million b/d p.a. in the four prior years.
The effect of low oil prices has played a part, especially when it comes to gasoline demand. It’s been a very different story in the block of non-OECD countries, where the growth rate has almost halved to 0.9 million b/d between the same two periods. What’s going on? I asked our senior oil demand analyst, Research Director Linda Giesecke.
One key factor has been the sheer strength of the global economy, particularly in the US and Europe. We’ve raised our forecasts for GDP growth for both in the last two years, and 2017 saw the fastest global growth in six years. All this feeds through to oil demand.
US oil demand is set to grow this year by nearly 0.5 million b/d – twice as fast as 2017, fuelled by buoyant growth in transport fuels and a burgeoning petrochemicals sector.
In Europe, Germany is the poster child, demand surging more than any other major country on the continent and with similar sectors driving the story. Among OECD economies, only Japan’s oil demand has fallen since 2014.
Patchy demand growth among emerging economies is another big factor. Growth slumped after 2014 in big oil producing markets like Venezuela, Brazil, Russia and Saudi Arabia – all oil- and gas-dependent economies that have been dragged down by the fall in price.
While China remains extremely important to global demand growth, its growth rate has slowed since 2014. On the flip side, India has seen demand grow quickly in recent years, although the ride has not been smooth.
The biggest risk to oil demand’s winning growth streak is a trade war undermining the global economy.
If that’s averted, demand growth will play a critical part in helping the oil market to return to balance by around 2020. And that’s a lesson OPEC needs to bake into its long-term strategy.
There’s a certain irony in short-term demand being such an upbeat story. The narrative since 2014 has veered toward the pessimistic, focusing on the long term – EVs taking over, peak oil demand, and the sun eventually setting on the industry. These big questions won’t go away, of course, and we will address them in our research in the coming months.
The Edge newsletter takes a holiday break this week.